Finance Commissions disparities in award for Mountain States

A LOOK AT THE DISPARITIES IN THE OVERALL DEVOLUTION OF CENTRAL RESOURCES TO THE MOUNTAIN HILL STATES FOR 2015-16 THROUGH THE AWARD OF FOURTEENTH FINANCE COMMISSION

 The scheme of devolution of central resources to the States, in general, and to the mountain hill States earlier on designated as special category States, in particular, has to have an equalising character since the developmental problems of these States are largely identical. These States suffer from similar constraints of development and administration. The costs of development are far higher in these States as compared to all other mainstream States because of the topography, climate and sparseness of the population. The costs of administration are implicitly high because it has to get as close to people as possible on the one hand, and the salary structures have to be such that essential services are provisioned in the far flung areas which many a time completely lack creature comforts of urban life like schooling and emergency health services etc. , on the other. It could be generically said that the awards of various Finance Commissions have looked at these constraints carefully to equalise the resource transfers, yet certain disparities persist due to mathematical treatment of the devolution design. This note briefly looks at the disparities in terms of their narrowing or widening within the comity of these mountain hill States.

 For the above purpose, let us look at the data for the years 2014-15 and 2015-16 in comparison to take a call on the object of this note. The data on total devolution for these two years from centre to States under study is contained in the following table:-

$ : These figures are without the central assistance for plan financing for the year 2014-15 as the central assistance was a separate transfer from the Finance Commission devolution.

# : The figures for 2015-16 are inclusive of the transfer on account of the plan financing support because such support has been discontinued to be determined separately and made an integral part of the fFinance Commission devolution. It is entirely up to the States that they have a plan of whatever size which is possible to be financed within the aggregate transfers and State’s own resources, if any, to fund such a developmental plan.

The data in the above table has been presented to look at the relative variation in the devolution pattern per capita for the last year of the Thirteenth Finance Commission award  and the first year of the the Fourteenth Finance Commission award. The minima and maxima values for 2014-15 were Rs. 3748 for Uttarakhand and Rs. 23180 for Sikkim. Compared to the average for all the States put together at Rs. 8974, these were multiples of the order of 0.4177 and 2.5830, respectively. Coming to the data for 2015-16, the minima was Rs. 5462 for Uttarakhand whereas the maxima was Rs. 52290 for Arunachal Pradesh. Compared to the average of Rs. 22122 for all States in this group this year, the minima and maxima were multiples of the order of 0.2469 and 2.3637, respectively. Within the series for each year, we realise that the per capita devolution has a higher variability for 2015-16 as compared to 2014-15. Thus, the Fourteenth Finance Commission appears to have widened the disparities within the group of erstwhile Special Category Hill States.

 It however, needs to be kept in mind that three States namely Arunachal Pradesh, Tripura and Uttarakhand are surplus on revenue account after devolution of share in central taxes whereas the others become surplus on revenue account with the devolution of revenue deficit grants. Having said that, let us look at the overall           revenue account situation for all the mountainous Special Category States for 2014-15 and 2015-16  in terms of the improvements in their resources through the central transfers resulting from the implementation of the Fourteenth Finance Commission award for which the data is depicted in the following table.:-

 (Rs. crore)

One observes that these states are better off by over Rs. 49000 crore in the first year of the award. Whereas the revenue deficit grants are a fixed sum over the five year period, the tax share shall be a function of the buyoant or otherwise situation of the central revenue collections. Given the promised fast tracking to roll out the combined Goods and Services tax from 1^st April, 2016, one hopes the tax devolutions to individual States will show buoyancy. The States of Arunachal Pradesh, Tripura and Uttarakhand  have become  surplus on revenue account after the devolution of their share in central taxes and as such did not need any devolution by way of gap filling grants for meeting the unmitigated revenue account deficit. Still eight out of these 11 States are far away from that situation and needed revenue deficit grants.

Since the gross numbers can be a bit misleading in the sense that Jammu and Kashmir gets an extra Rs. 11407 crore for 2015-16 over the level of 2014-15 looks to be the biggest gainer and Sikkim appears to be the smallest beneficiary. A clear perspective emerges from denominating these gross gains by the population of individual States according to the 2011 census. The per capita incremental devolution for various States  gives an interesting picture as is revealed in the table given below:-

Per capita incremental devolution to various Special Category States (Rs.)

Based on the above numbers, Arunachal Pradesh is by far the biggest gainer in the devolution design of the Fourteenth Finance Commission at an incremental per capita devolution of Rs. 44278.54 for the single year. It is way ahead of the next two States of Sikkim (Rs. 18348.23) and Mizoram (Rs. 26008.50). The next in series is Nagaland at Rs. 15949.69, followed by Himachal Pradesh with a per capita incremental gain for 2015-16 at 12693.04. Manipur comes next with Rs. 9784.12 followed by Jammu and Kashmir at Rs. 9090.03. All other States are at a much lower level of gain but the State which has gained least is Uttarakhand at only Rs. 1713.99. The additional  per capita devolution to Arunachal Pradesh is about 26 times the level for Urrarakhand. This brief analysis indicates the disparate levels of transfers when denominated by population. Although population has been an important determinant in the devolution formula for horizontal allocation among the States, yet it is observed that the formula has led to a certain skewness in the incremental devolution for 2015-16 as compared to 2014-15.  Population is an important element in the analysis because all the development has to be population centred. However, in the context of Himalayan States, the area becomes an overbearing factor in determining the costs of development – even though there may not be any factoring in of the topographical variations among these States.

 Therefore, a similar study on the basis of per unit transfer of area for these States becomes important and will also reveal another story. Looking at the total transfer per square kilometre of area is equally relavant because the infrastructural development has to take place on the ground. There are certain topographical variations berween the States but one could make an assumption that all these States are located in the lap of Himalayas and thus are similarly situated. We need to see if the disparities on this parameter are also as widely varying from State to Stae as was in the case of population based parameter.The data in this regard is presented in the following table:-

Incremental devolution to various Special Category States per square kilometre of area for 2015-16 as compared to 2014-15            (Rs. lakh)

 It is seen that the variability based on the per unit of area additional transfers is far less skewed as compared to the per capita additional transfers since the highest additional transfer transfer of Rs. 20.28  lakh for Sikkim is only about six times of the least additional transfer of Rs. 3.24 lakh for Uttarakhand. We, therefore , come to the conclusion that the gain in resource transfers for these eleven States has a wider variability on the per capita basis as compared to the per unit of area variability.

 At the overall level, these States are in a much advantageous situation as compared to the resource transfers through the Thirteenth Finance Commission but the award of the Fourteenth Finance Commission has increased the disparity in the command of financial resources among these mountainous States in terms of transfers from the centre. The most important consideration for these States in terms of sound financial management is to very carefully analyse their revenue expenditure accounts and use utmost prudence in containing unabated growth in the expenditure on salaries and pensions on the one hand,and make the outgo on subsidies entirely merit based, on the other. Managing expenditure account is for more critical in the case of these States because they suffer from inherent disability of severely limited capacity for raising financial resources and would gain precious little by over-stretching their taxation efforts. The constraint of a small sized economy having narrow tax base and nearly inelastic tax rates is formidable in the perspective of fiscal management. The solution lies in managing the growth of expenditure and increasing the efficiency of such expenditure in enhancing the larger public good.

DK Sharma

Devinder Kumar Sharma, a former Principal Adviser and Secretary Planning, Government of Himachal Pradesh, is a visiting professor and an economist. He lives in Shimla.